Why Does The Mortgage-Interest Tax Deduction Still Exist?

If you have a mortgage on your home, you can deduct the interest from your taxes. It's a popular, well-entrenched policy. But according to one policy adviser to a U.S. senator, "the mortgage-interest deduction, from a purely policy perspective ... makes no sense."

It's a view that's supported by a mountain of academic research: The mortgage-interest tax deduction benefits the rich more than the poor, has little effect on home ownership and isn't even really a bargain for homeowners because it raises home prices.

So do policy advisers tell members of Congress to fight the mortgage-interest tax deduction?

"If you're relatively green in Washington, I suppose that happens. And I suppose you're laughed at," said the adviser, who preferred not to give his name for fear of losing his job. "The mortgage-interest deduction is a sacred cow."

Everyone in Washington, D.C., knows that there are many powerful forces making sure that no one ever suggests getting rid of the mortgage-interest deduction. Jimmy Williams, a former lobbyist for the National Association of Realtors, was one of those forces.

"If I were at the Realtors right now, I'd declare war" on anyone who tried to get rid of the deduction, Williams says.

He would run ads, encourage Realtors across the country to make phone calls and give money to the most powerful legislators in Washington. "And then you sit back and just say, 'You really want to go down this path? That's just not a really smart way to run for re-election.' "

Jamie Gregory, who currently lobbies for the Realtors, says if you got rid of the deduction tomorrow, home prices would fall all over the country, which would destabilize the economy. And besides, he says, the biggest lobby in favor of the deduction is homeowners.

"For middle-class Americans, either doing away or limiting the mortgage-interest deduction is going to be a tax increase," he says.

People who have bought a house assuming they'll get a break on their taxes each year want that tax break. They might not be able to afford the house they're in without it.

Of course, you could phase out the deduction out over time, making it apply only to future homebuyers. Who knows what solutions smart policy staffers in D.C. could come up with — if they weren't afraid of being laughed at for being so naive?

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Transcript

DAVID GREENE, HOST:

And now to a different kind of money issue back here in the United States. We hear a lot about the influence of money in politics, but where that influence exists can be murky. It doesn't seem all that easy to pinpoint some law or policy that would be different if money were taken out of the equation.

Well, Alex Blumberg, from our Planet Money Team, has a look at one policy in particular. It's very popular and well-entrenched, and it might not exist without the influencing role of money.

ALEX BLUMBERG, BYLINE: You may be familiar with the policy in question. If you own a home, if you have a mortgage, you can deduct the interest you pay on that mortgage from your taxes.

UNIDENTIFIED MAN: The mortgage interest deduction. You know, from a purely policy perspective, as currently construed, it makes no sense.

BLUMBERG: I talked to this guy, a staffer for a U.S. senator. He preferred not to give his name because he was afraid he'd lose his job if he spoke to the press. And his job was to advise his boss, the senator, on financial policy matters. And this might be surprising, but there's a mountain of academic research supporting the staffer's view that the mortgage interest deduction is bad for the country.

Studies show it benefits the rich more than the poor. It has little affect on home ownership. And it might not even be a bargain for homeowners because the deduction, the amount you get back, is priced into the amount you paid for the house in the first place. After all, the Realtor knows you're getting the deduction. So, say, for example...

UNIDENTIFIED MAN: You're going to get $8,000 a year in mortgage interest deduction to be able to able to write off? Just jack the price up of the house $8,000. Why not? The consumer doesn't know, and there have been a number of studies that have shown that to be the case.

BLUMBERG: So if you're job is to make policy recommendations to a U.S. senator when it comes to the mortgage interest deduction, it seems pretty clear what you do.

Do you ever write to your boss and say hey, you know, I think you should think strongly about, you know, writing a bill to take this out of law?

UNIDENTIFIED MAN: You know, if you're relatively green in Washington, I suppose that happens - then I suppose you're laughed at. The mortgage interest deduction is just - it's a sacred cow.

BLUMBERG: Everyone in Washington knows that there are many powerful forces making sure that no one ever suggests getting rid of the mortgage interest deduction. Jimmy Williams was one of those forces. He's a former lobbyist for the National Association of Realtors, and I asked him to imagine some senator saying publicly he wanted to kill the mortgage interest deduction.

JIMMY WILLIAMS: If I were at the Realtors right now, I would declare war on something like that.

BLUMBERG: Williams says his organization would have gone into attack mode - run ads, encourage the more than 1 million Realtors across the country to make phone calls.

WILLIAMS: And also, what do you do? You throw money around. This would be done in the Finance Committee, and the Ways and Means Committee. Basically, you go through and you tap every single member of Ways and Means, and on Finance, and you make sure that everybody that sits on those committees, that has been loyal to you, that you host fundraisers for them; that you make sure that they've got those checks in han. And then you sit back and just say: You really want to go down this path? That's just not a really smart way to run for re-election.

BLUMBERG: And it's not just the Realtors. The mortgage banking lobby, and the construction lobby, also oppose removing the mortgage interest deduction. But Jamie Gregory, who currently lobbies for the Realtors, says that what's keeping the mortgage interest deduction in place is not the millions of dollars in political money his organization has. It's reality. He says if you got rid of the deduction tomorrow, home prices would fall all over the country - which would destabilize the economy. And besides, the biggest lobby in favor of the deduction? Homeowners.

BLUMBERG: People who have bought their house assuming they'll get a break on their taxes each year, they want that tax break. Maybe they couldn't afford the house they're in without it. Of course, there might be ways around this, ways to make removing the mortgage interest deduction less painful for current homeowners. You could phase it out over time; make it apply only to future homebuyers. Who knows what solutions smart policy staffers in D.C. could come up with, if they weren't afraid of being laughed at for being so naive.